Who wouldn’t want to invest in a high-growth segment of the stock market? After all, high share price growth is the main reason most us originally start investing.
We only discover the delights of dividends later.
So the London Stock Exchange’s decision to supplement the main stock market with a new High Growth Segment (HGS) will whet many investor appetites.
Sweet Little Segment
The HGS is designed to help mid-sized European and UK companies get access to capital by giving them a public platform on which to grow.
Tech companies are expected to lead the charge.
To qualify, businesses must show they have the potential to deliver “significant growth” in revenues, with a longer-term aspiration to join the premium section of the main market.
By significant, it means historic revenue growth of 20% over three-year period.
Now that looks like something to sink your teeth into.
A Taste For Adventurous Stocks
Make sure you understand the risks, because some of the juiciest investment opportunities can quickly lose their flavour.
Which is what seems to be happening with online takeaway service Just Eat (LSE: JE), the first company to list on the HGS.
Last week, Just Eat ended its first day of trading a spicy 23p above its issue price.
That left the company valued at an astonishing £1.6 billion, more than 100 times its underlying earnings of just £14 million.
So yes, the high growth segment of the stock market looked like the right place for it.
At least it did.
Just Eat has given off a nasty niff in recent days, as sentiment has shifted against technology stocks amid widespread concerns over sky-high valuations.
Many now see Just Eat as a symbol of a sector that has just got too frothy.
After peaking at 290p, it has quickly dipped to 252p. This stock looks a little too risky for me.
12 Months, 1 Listing
Although the HGS was launched in March last year, Just Eat is its first IPO. The company’s dramatic debut has alerted investors to the potential of this new index, and the pitfalls.
One of the attractions of the HGS is that companies only need to float 10% of their equity, against the 25% needed to join the main market. Although they must be worth at least £30 million.
The aims to encourage companies to list at an early stage of their development, without handing over too many of their shares to outsiders.
It also allows them to sidestep AIM, and list straight onto the main LSE, hopefully building a faster profile.
Hoopla About Zoopla
HGS was launched to rival the US NASDAQ. The government hopes it will encourage the UK equivalent of Facebook or Twitter.
So what other companies can we expect to list?
Designer website MADE.com and cheap flight comparison service Skyscanner have both been mentioned as potential HGS-listers.
Property website Zoopla has also been said to be eyeing up a listing.
Zoopla would make sense: a property company to go alongside a food company. Whenever I turn on the TV, most shows seem to be about one or the other.
To raise its profile, HGS needs a success story. Something a little tastier than Just Eat. So keep your eyes peeled for the next listing, it could prove a great high-growth opportunity.
Harvey Jones doesn't own shares in any companies mentioned in this article